13 terms you need to understand before signing your commercial real estate lease
Whether negotiating the terms of your commercial lease agreement, or trying to get a better picture of the full costs you’re about to assume, understanding the sometimes-confusing terminology of your contract is crucial.
While it’s always best to have your lawyer (preferably one specializing in commercial real estate) review your agreement, here are some of the more common terms you’ll want to get clear about–before you sign.
1. Incidental expenses
Your costs on top of base rent. These can include property tax, insurance, utilities, maintenance, common area costs and repairs.
2. Common area maintenance
An incidental expense in some commercial real estate leases. All tenants generally share common area costs. Examples include fees for snow removal, janitorial services, landscaping, grass cutting and property management.
3. Gross rent lease
A type of commercial real estate lease under which you pay a single amount to the landlord that covers base rent and all incidental expenses.
4. Modified gross lease
A type of a commercial real estate lease under which you and the landlord share certain incidental expenses.
5. Net lease
A type of commercial real estate lease under which you typically pay for one incidental expense directly. In a single net lease, you usually pay the base rent plus property taxes (though in some cases, you might pay for insurance or utilities instead). The landlord pays all other expenses.
6. Double net lease (NN)
A type of commercial real estate lease under which you usually pay the base rent plus two incidentals—for example, property taxes and insurance. The landlord covers all other expenses.
7. Triple net lease (NNN)
A type of commercial real estate lease under which you typically pay the base rent, plus property taxes, building insurance and utilities, as well as other operating and maintenance costs. The landlord assumes no costs, other than those for structural repairs.
8. Percentage rent lease
A type of commercial real estate lease under which you pay a base rent plus a percentage of gross sales over a certain minimum. These are usually used in malls and other multi-tenant retail locations.
9. Tenant improvement allowance
A cash amount offered by a landlord to help you pay for renovations to a leased space. The allowance is usually a certain amount of money per square foot of rented space. It is sometimes offered as a tenant inducement.
10. Tenant inducements
Incentives offered by a landlord to encourage you to rent a space. Examples include several months rent free or help with paying for leasehold improvements.
11. Trade fixtures
Items in a leased space that you can take with you when you move out. A trade fixture can generally be easily removed without damaging the property. Examples include furniture, inventory and computers. Get advice from a commercial real estate lawyer before signing a lease to clearly define trade fixtures and to seek exclusions for assets you want to take with you when you leave.
12. Turnkey improvements (also known as turnkey buildouts)
Renovations that a landlord carries out at your request when you sign a lease. A landlord may agree to these as a tenant inducement.
13. Leasehold improvements (also known as tenant improvements)
Renovations to a leased commercial real estate space to make it suitable for your business. Unless otherwise specified in the lease, any improvement that is attached to the building usually becomes the property of the landlord—meaning you can’t take it with you when you move out. Examples can include machinery, flooring and built-in shelving. Get advice from a commercial real estate lawyer when negotiating a lease to seek exclusions for assets that you want to take with you when you leave.
Remember: If necessary, you can always apply for a leasehold improvement loan, a short-term loan (often amortized over five or six years) that you can use to pay for renovations to a leased space. You can sometimes negotiate a principal holiday for the first six to 12 months of the loan. Depending on the value of the improvement, a bank may accept the improvement as collateral for the loan, which could result in a lower interest rate than that for an unsecured loan.